How Mergers, Acquisitions and Broken Deals Hit ETFs

December 14, 2008 at 1:00 pm by Kevin Grewal

Uncertainty and instability in the credit markets, financial markets, and the overall global economy has forced many companies to back out of potential merger and acquisition deals slamming stock prices and exchange traded funds (ETFs).

A study by Thomas Reuters indicated that the total value of canceled mergers for the quarter is at an astonishing $322 billion, an amount almost equal to the value of completed mergers. Another study by UBS, shows that one-third of all potential mergers have been nipped in the bud before consummation and the value of mergers and acquisitions for the year is at $2.8 trillion, down 27% from the prior year.

In fact, recently mining giant BHP Billiton (BHP) backed out of its planned acquisition of Rio Tinto (RTP), sending shares of Rio Tinto down 37%. Although BHP was able to secure the necessary debt for the acquisition to go through, they were wary of investor reaction to picking up this extra debt; since the call off, the price of insuring BHP against default has fallen dramatically, states the Economist.

To make it even more problematic, rumors have stirred up that the acquisition of telecom giant BCE (BCE) by private equity groups and the acquisition of Genentech (DNA) by Roche may be next on the list to hit the skids.

These failures, and potential failures, of transactions will have drastic affects on the ETFs that have these relinquishing companies as major holdings, sending their prices down the drain. It’s important for investors to watch these deals and to be aware of which of these companies they might be holding.

It isn’t all gloom for for the M&A industry. When funding can be aquired and stability reaches the financial market, weaker firms will be more accepting of offers and some of these deals that have been called off may be rekindled.

iShares MSCI Australia Index Fund (EWA): is down 53.7% year-to-date; BHP is 13.3% and RTP is 3.1%